Legal obstacles will block regulators' view of systemic risk in the OTC derivatives market well into 2014 even though reporting obligations kicked in at the end of last year.
Since 31 December, large market participants have been required to report interest rate and credit default swap transactions regulated by the Commodity Futures Trading Commission (CFTC), the US listed derivatives regulator.
Swap data repositories (SDRs) licensed by the CFTC have been compiling transaction data from swap dealers and major swap participants for public dissemination and review by regulators, fulfilling in theory one of the key reforms to OTC markets demanded by the Group of 20 (G-20) leaders in the aftermath of Lehman Brothers' bankruptcy in 2008.
But regulators outside the US are a long way from getting access to the data they need to identify and avoid the next asset bubble, according to Stewart Macbeth, CEO of DTCC Deriv/SERV, which operates the SDR that has collected the majority of the data to date.
"There are fairly significant impediments to the sharing of data on OTC derivatives exposures between regulators as legislation stands today in different jurisdictions," said Macbeth.
A unit of the Depository Trust and Clearing Corporation (DTCC), Deriv/SERV runs the US post-trade services utility's global trade repository, based on data centres in the US, Netherlands and Singapore. DTCC holds one of three SDRs licences granted by the CFTC - the others are held by CME Group and the Intercontinental Exchange - but it has seen most volume due in part to its dominant position in matching and reporting major OTC derivatives instruments.
DTCC's notional coverage of the reported asset classes is 99% for credit derivatives and 70% for interest rates. Following six weeks of statutory reporting to the CFTC, the firm has reported interest rate positions totalling US$4 million, and US$178,000 in credit positions, the latter figure representing credit index trades that are subject to netting. Reporting of OTC FX, equity and commodity derivatives transactions will commence on 28 February for swap dealers and major swap participants. All market participants - including all buy-side institutions without exemptions - must begin reporting trades in all asset classes on 12 April.
DTCC Deriv/SERV is currently transmitting data to the CFTC via secure FTP, but foreign regulators' access to the data - which may have significant implications for the stability of their own financial systems - is more complex, largely because the Dodd-Frank Act imposes costs via its indemnification and confidentiality provisions.
In October 2012, the CFTC issued 'interpretive guidance' that enabled foreign regulators to be granted exemption from the indemnification and confidentiality provisions of Dodd-Frank "under certain circumstances". In principle, this removed the cost barrier to non-US regulators accessing participant data reported pursuant to foreign law if the SDR is registered and authorised in the country in question.
But this exemption does not support data sharing between the CFTC and other regulators. It only grants access to data held at a US-registered SDR but which is required to be reported by a foreign jurisdiction. As such, non-US regulators might reason that it would be simpler to set up their own directly regulated domestic trade repository, thus fragmenting data across multiple trade repositories and making it harder to assemble a global view.
"There are hard economics to consider from the perspective of the costs to regulators of accessing and aggregating data from multiple sources," said Macbeth, who acknowledges that the fewer trade repositories is commercially preferable for scale providers such as the DTCC.
Due to the limitations of a regulatory modification to a statutory problem - the CFTC's interpretive guidance could easily be revoked - there are hopes that a "legislative fix" can be negotiated in the US Congress to clarify the scope and applicability of the provision.
In Europe, the European Securities and Markets Authority's technical guidance for the European market infrastructure regulation (EMIR) distinguishes between regulators in other jurisdictions based on whether or not they have a national trade repository. This will have implications for reciprocal sharing of reported data. Recognition of a foreign trade repository will probably require an international agreement under EMIR, rather than interpretative guidance from the regulator.
To date, regulators have only really shared data with each other on an ad hoc basis relating to specific events and as such there are no widely accepted agreements. Currently, DTCC Deriv/SERV provides data based on guidelines from the OTC Derivatives Regulators Forum, which have been in place since 2010. But the new OTC derivatives reporting requirements are broadening the scope for potential conflicts of interest between regulators.
For example, a foreign regulator may have an interest in certain data in a US-registered SDR with respect to the currency or underlying reference entity, even though neither party to the transaction falls under that regulator's direct reporting regime oversight authority. If a US and a London-based bank trade on an equity swap involving a Japanese underlying entity, and the trade is reported to a US SDR, Japan's Financial Services Agency can be considered to have a legitimate interest in accessing such data.
CPSS-IOSCO guidelines on how regulators should share data are due for public release in March, but many believe removing the Dodd-Frank indemnification clause is a prerequisite for enabling data sharing initiatives between regulators.
"If we end up with more trade repositories than systematically-important financial institutions we will not have made progress in monitoring systemic risk in the OTC derivatives markets since the collapse of Lehman Brothers," said Macbeth.